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TMI Blog2015 (8) TMI 1437X X X X Extracts X X X X X X X X Extracts X X X X ..... working capital could be adjudicated at a later point of time if and when required. Grievance of the assessee regarding working capital adjustment is restriction thereof to 1.71%. 3. Facts apropos are that assessee a company engaged in the business of providing software design and maintenance service and marketing support had operating revenues of Rs. 85,32,91,086/-. Margin of profit of the assessee on its cost for the relevant previous year was as under : Description (Rs.) Operating Revenues 85,32,91,086 Operating Expenses 77,42,84,656 Operating (Profit/Loss) 7,90,06,430 Op Profit on cost % 10.20% 4. Profile of the assessee as stated by the TPO is reproduced hereunder : ARM Embedded Technologies P. Ltd is a subsidiary of ARM Ltd UK. It provides software design, development and maintenance services to its associated enterprises. It also provides marketing support services with regard to sale of ARM Ltd products in India. 5. International transactions of the assessee with its AE were as under : Type of Transactions Paid Received Software Development & Maintenance Service -- 83,23,84,234 Marketing Support Service -- 25,26,54,300 Resource Augmentation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd 45.61 Arthmetical Mean 24.32 7. Common comparables were Akshay Software Technologies Ltd, Bodhtree Consulting Ltd, L & T Infotech Ltd, Mindtree Ltd (seg) and Persistent Systems Ltd., On the above adjusted arithmetic mean, AO effected a negative working capital adjustment of 1.71% and fixed the PLI of comparables at 22.61%. Adjustment required to be made u/s. 92CA of the Act, was worked out by the TPO as under : Arms length mean margin 24.32 Less : Working Capital Adjustment 1.71 Adjusted mean margin of the comparables 22.61 Operating cost Rs. 77,42,84,656/- Arms length Margin (22.61% of Operating cost) Arms length price (ALP) : 122.61% of Operating cost Rs. 94,93,50,417/- Price received Rs. 85,32,91,086/- Shortfall being adjustment u/s. 92CA Rs. 9,60,59,331/- Assessment order was completed making addition of Rs. 9,60,59,330/-. 8. Aggrieved assessee moved in appeal before the CIT (A). Assessee sought exclusion of comparable which were having turnover in excess of Rs. 200 crores since its own turnover was way less at about Rs. 85.32 crores. Assessee also sought exclusion of Bodhtree Consulting Ltd and M/s. Kals Information Sys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and FCS Software Solutions Ltd, Ld. AR submitted that these companies were proposed by the TPO herself in her show cause notice dt.17.12.2012 and assessee had accepted them to be proper comparable. However, according to him, these were rejected by the TPO giving a reason that working capital adjustment impact was more than 4% of the profits of these companies. As per the Ld. AR, TPO erroneously concluded that these companies were engaged in financing activities, whereas the records speak otherwise. According to him, profit and loss account of these companies would show that these non-operational income were negligible when compared to the operational income. Thus according to him, citing a wrong reason of extra-ordinary working capital adjustment. TPO had rejected these comparables. As per the Ld. AR if these two comparables were also considered then what would be left would be the following four comparables, giving to an average PLI of 10.23% : Sl. No. Comparables selected by TPO NCP Margins (%) (without WC adjustment) NCP Margins (%) (With WC adjustment) 1 Akshay Software Technologies Ltd 8.11 7.57 2 R S Software (India) Ltd 9.97 9.99 3 Thinksoft Global Services P. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the decision of the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, ITA No. 7633/Mum/2012, order dated 6.11.2013. In this case, the Tribunal followed the decision rendered by the Mumbai Bench of the Tribunal in the case of Wills Processing Services (I) P. Ltd., ITA No. 4547/Mum/2012. In the aforesaid decisions, the Tribunal has taken the view that Bodhtree Consulting Ltd. is in the business of software products and was engaged in providing open & end to end web solutions software consultancy and design & development of software using latest technology. The decision rendered by the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. (supra) is in relation to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Following the aforesaid decision of the Mumbai Bench of the Tribunal, we hold that Bodhtree Consulting Ltd. cannot be regarded as a comparable. In this regards, the fact that the assessee had itself proposed this company as compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and Material (T&M) Contracts model in which Customer are billed on the basis of hours worked by the employees of supplier software companies. Hourly rates are agreed on by both parties and are applied to the total hours worked to arrive at the revenue that is to be recognized. The second is the Fixed Price Project Model (FPP). Under the Fixed Price Project Model, the total contract price is agreed upon between the parties. Billing may be done either at the end of the contract or over the period of the contract on the basis of the agreed milestone for billing. In this respect, the basis of revenue recognition by this entity can be seen from the annual report as below: 3. Revenue Recognition : Revenue from software development is recognised based on software developed and billed to clients. From perusal of the above, it is seen that this entity is engaged in building revenues through Fixed Price Project model. As is a natural corollary in such type of revenue recognition, some part of the expenditure may be booked in one year, for which the revenue may have been recognised in the earlier or subsequent year. Therefore, it is but natural that there is some fluctuation in the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nformation System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds." Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s. 133(6) of the Act. This information which was not available in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n those companies whose profit margin is predominantly from operating business and not from financial activities. This prerequisite is not different in case of software development companies as they do not need any interest bearing funds to manage their working capital requirement. Therefore, with the purpose to identify only those uncontrolled comparables who are having profit margin from core operating activities and not from financial activities, the following two companies having working capital impact of more than 4% on profit have been excluded." 21. TPO has accepted that these companies were functionally similar to that of the assessee. However, according to her, the margins of these companies had not come from its core operating activities but from financial activities. Profit and Loss account of M/s. Thinksoft Global Solutions for the relevant previous year is placed at paper book page.247. Software service revenues of the said company came to Rs. 920921452/-. Other income of the said company came to Rs. 35,738,801/-. Break-up of the other income as given at schedule 10 placed at paper book page.256 show that out of such amount Rs. 26,536,978/- was exchange gain. Interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of the taxpayer is allowed as per the calculation in annexure-C or the average cost of capital to the comparables whichever is the least. The detailed discussion on this is given in the Annexure-D to the order. The computation of the working capital adjustment is annexed to this order as Annexure C." TPO had restricted the cost of capital to 1.71%. Rationality for such an upper limit being placed on working capital adjustment was an issue which had come up before this Tribunal in the case of Rambus Chip Technologies (India) (P.) Ltd. v. Dy. CIT [IT (TP) A. 23/Ban/2015, dt. 22.07.2015. Coordinate bench had held as under at para 13 and 14 of its order: "13. As regards ground No. 3(f), learned counsel for the assessee submitted that the AO/TPO while considering the working capital adjustment, has arrived at the working capital adjustment in the case of the assessee at 5.97%, but while giving effect to the working capital adjustment, has restricted the said adjustment to 1.71% in case of uncontrolled comparables selected by the TPO. The learned counsel for the assessee submitted that the TPO has not given any basis for such restriction of the working capital adjustment. He s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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